The New Reporting Standard for Government Combinations

Understanding GASB Statement 69

In today's economic environment, governments are looking for ways to provide services at the lowest possible cost; this includes combining some services with other governments or organizations. The accounting for different types of government combinations is governed by the recently released GASB Statement 69, Government Combinations and Disposal of Government Operations (issued in January 2013), which defines certain combinations as mergers, acquisitions, or transfers of operations.

In all three cases, the standard requires a continuation of a substantial portion of the services provided by the previously separate entities. The terms and conditions of the arrangement will often address service continuation; if they do not, professional judgment should be used to determine whether service continuation was intended. Auditors and accountants must understand the guidance in this standard, which differs significantly from the guidance used by private-sector organizations for business combinations.

Government Combination Types

The Exhibit provides an overview of the three types of government combinations covered under GASB Statement 69: merger, acquisition, and transfer of operations.

Merger. A government merger is defined as a combination of legally separate entities in which no significant consideration is exchanged and either-

* two or more entities (at least one being a government) cease to exist as legally separate entities and combine to form one or more new governments, or

* one or more legally separate governments or nongovernmental entities cease to exist, and their operations are absorbed into and provided by one or more continuing governments.

Acquisition. When one government acquires another entity or its operations in exchange for significant consideration (in relationship to the net assets acquired) and the entity or operations become part of the acquiring government's operations, it is considered an acquisition.

Transfer of operations. A transfer is defined as a combination in which operations are transferred from an entity, rather frían a combination of legally separate entities, to either an existing government or to a new government. No significant consideration is exchanged as part of a transfer.

Recognition of Combinations

Mergers can result in the formation of a new government or the continuation of an existing government. In the former case, the merger date reflects when the combination becomes effective, and this represents the beginning of the new government's initial reporting period. In the latter case, the merger date is the beginning of the reporting period in which the combination occurs, regardless of the actual date of the merger.

For an acquisition, the date the acquiring government obtains control of the net assets of the acquired entity or its operations-generally, the closing date on which the acquiring government provides consideration-becomes the acquisition date.

For a transfer of operations, the date the government obtains control of the assets and becomes obligated for the liabilities of the operations transferred is the effective transfer date. For a transfer of operations that results in a new government, the effective transfer date marks the start of the new government's initial reporting period.

Carrying Values Used for Mergers and Transfers of Operations

In a government merger or transfer of operations, assets, deferred outflows of resources, liabilities, and deferred inflows of resources are generally reported at their carrying values as of the merger date or transfer date. The carrying values are the amounts reported in the separate financial statements of the entities involved in the combination. If financial statements are not available as of the merger date or transfer date, the values can be based upon tiie most recent financial statements.

Sometimes, organizations involved in a merger or transfer of operations use an accounting method not in conformity with authoritative guidance for state and local governments or not consistent with the accounting method used by the new or continuing government. Adjustments to the carrying values are allowed in order to bring reporting into conformity with such guidance or to reflect a consistent method of accounting. The new or continuing government should not recognize additional assets, deferred outflows of resources, liabilities, and deferred inflows that authoritative guidance for state and local government does not require or permit.

Capital assets will sometimes be disposed of as part of a merger or transfer of operations. If a decision is made to dispose of an asset prior to the merger date (the effective transfer date for a transfer of operations or the effective merger date for a continuing government), the asset should be measured at its carrying value if the government will use the asset until disposal occurs. If the new or continuing government will not use the asset, it should be tested for impairment under GASB Statement 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. A similar evaluation should be made for a change in the manner or duration of use related to a capital asset.

In the case of a merger, the new or continuing government will record beginning net positions from the combined carrying values of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the merging entities. In the case of the transfer of operations to a continuing government, that government should report the net position received or assumed from tiie transfer as a special item. In the case of tiie transfer of operations to a new government, that government should report the net position received or assumed at the beginning of its initial reporting period.

The reporting of a merger or transfer of operations in a governmental fund will follow the financial reporting requirements for governmental funds (flow of financial resources). For mergers, the beginning fund balance should be adjusted for the net fund balance obtained. For a transfer of operations to a continuing government, a special item should be reported for the net fund balance obtained.

Acquisition Value Used for Acquisitions

Assets, deferred outflows of resources, liabilities, and deferred inflows of resources are generally reported at acquisition value in a government acquisition. Acquisition value is defined as a market-based entry price; it is further defined in GASB Statement 69 as follows:

An entry price is assumed to be based on an orderly transaction entered into on the acquisition date. Acquisition value represents the price that would be paid for acquiring similar assets, having similar service capacity, or discharging the liabilities assumed as of the acquisition date.

Sometimes, an acquired organization uses an accounting method not in conformity with authoritative guidance for state and local governments. The acquiring government should make adjustments to report items in conformity with authoritative guidance and, in some cases, should recognize assets, deferred outflows of resources, liabilities, and deferred inflows of resources not reported by the acquired organization.

Certain items should not be reported at acquisition value; instead, they should be reported using the relevant accounting and financial reporting requirements for state and local governments. These include items related to compensative absences; pensions; other postemployment benefits; termination benefits; landfill closure and postclosure costs; pollution remediation; investment, including derivatives; and effective hedging arrangements.

Sometimes, an acquired organization will have recognized a deferred outflow of resources (or goodwill) from a previous acquisition transaction, one in which the consideration provided exceeded the net position. The acquiring government should not recognize this amount.

As stated earlier, significant consideration is exchanged in an acquisition. The amount of consideration is usually measured by the values of the assets acquired or the liabilities incurred by the former owners; however, an acquisition may also include a potential future transfer of cash or other assets upon specified future events (i.e., contingent consideration). A government should recognize contingent consideration if, prior to the issuance of the financial statements, it is probable that this liability has been incurred and the amount can be reasonably estimâted. (See GASB Statement 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989, FASB and AICPA Pronouncements, on contingencies.)

In some cases, the consideration will exceed the amount of the net position acquired (measured as described above). The acquiring government should report the excess as a deferred outflow of resources, much like goodwill for a business. The deferred outflow of resources should be attributed to future periods in a systematic and rational manner. GASB Statement 69 provides some factors to consider in determining the length of the attribution period, but it does not set any maximum length. In addition, a government should periodically review and revise the attribution period as conditions change.

In other cases, the consideration will be less than the amount of the net position acquired (measured as described above). Sometimes, the seller will accept a lower price in order to provide economic aid to the acquiring government. The agreement would generally indicate if economic aid is intended. In this situation, the government would recognize a contribution.

For other acquisitions in which the consideration is less than the amount of net position acquired, the excess net position should be eliminated by reducing the noncurrent assets (other than financial assets) that are acquired. If the allocation reduces noncurrent assets to zero, the remaining amount should be recognized as a special item in the government-wide statement of activities. (If the acquisition is done through an enterprise fund, the special item would be reported in the statement of revenues, expenses, and changes in net position.)

Acquisition costs are generally recorded as an expense/expenditure in the period in which the costs are incurred and services rendered; these costs typically include legal, accounting, valuation, professional, and consulting services. The reporting of an acquisition in a governmental fund will follow the financial reporting requirements for governmental funds (i.e., the flow of financial resources). The net fund balance acquired should be reported as a special item

Disposals of Government Operations

A government should recognize any gain or loss on the disposal of operations as a special item in the period in which the disposal occurs. The gain or loss should not include normal operating costs incurred prior to the measurement date, only the costs directly associated with the disposal of operations. For example, benefits provided to government employees for involuntary terminations, contract termination costs, and professional fees are costs that may be associated with the disposal of operations. A disposal of an operation in a governmental fund should be reported as a special item. The amount reported should equal the fund balance of the disposed operation, net of any consideration.

Application

GASB Statement 69 provides new and different reporting requirements for mergers, acquisitions, and transfers of operations. GASB Chairman Robert H. Attmore stated the following in a recent GASB news release:

This Statement will improve accounting for mergers and acquisitions among state and local governments by providing guidance specific to the situations and circumstances encountered within the governmental environment. Historically, governments have accounted for their mergers and acquisitions by analogizing to guidance intended for the private-sector business environment, which proved problematic because those standards focus on stock arrangements and ownership interests not present in the governmental setting. ("GASB Improves Reporting for Government Combinations and Disposals of Government Operations," Jan. 8,2013)

Auditors and accountants should familiarize themselves with this guidance for government combinations. The effective date is for reporting periods beginning after December 15,2013, and it should only be applied on a prospective basis. It is important to note that this standard does not cover situations in which a government acquires another organization that continues to exist as a separate entity. It also does not address the acquisition of equity interest in organizations that remain legally separate. GASB Statement 14, The Financial Reporting Entity (as amended), provides guidance for these situations. ?

Assets, deferred outflows of resources, liabilities, and deferred Inflows of resources are generally reported at their carrying values as of the merger date or transfer date.

Bruce W. Chase, CPA, PhD, is a professor of accounting at Radford University, Radford, Va.